Russia’s Kurdish Pipeline Gamble

Rarely does one see such a multi-faceted move as Rosneft declaring it will build a $1 billion pipeline bringing gas from Iraqi Kurdistan to Turkey.

The 30 BCm/year pipeline would not only allow the ever-expanding Rosneft to fortify its position in Kurdistan and nip into the Turkish gas market, but it could also challenge the export monopolist Gazprom, as the heavy lobbying effort to liberalize access to gas exports failed on the domestic market, it seems it might work out in Turkey.

Rosneft-Kurdistan relations intensify by the minute. In February, the sides concluded an oil supply agreement. In July they signed a framework agreement. And in mid-September they formalized their commitment to build the Kurdistan-Turkey gas pipeline.

The deal creates a win-win situation for both Rosneft and the KRG government, yet is fraught with serious geopolitical consequences in a region where war remains the prevailing theme of the 21^st century.

The peculiarity of the project is that Rosneft will build the pipeline within the framework of a BOOT (Build-Own-Operate-Transfer) approach, even though in Russia this set of functions remains fully in Gazprom’s jurisdiction.

Rosneft intends to start marketing the gas on the domestic market by 2019, and by 2020, it wants to start supplying the first volumes of gas to Turkey and onwards.

Kurdish gas need not necessarily be marketed on the Turkish market, as the Transanatolian Pipeline (TANAP) which connects Azerbaijan’s Shah Deniz-2 to the Southern Gas Corridor (TAP), is desperately needing additional gas suppliers. Of the pipeline’s 16 BCm/year throughput capacity, 6-8 BCm/year could be easily filled with Kurdish gas.

The prospect of supplying Kurdish gas to Europe is particularly consequential in the long-term, after Shah Deniz-2 gets past its 16 BCm/year production peak and TANAP will face a genuine risk of being underutilized.

It seems unlikely that Rosneft will sell Kurdish gas, as the Kurdish Regional Government will probably retain this competence, the same way it controls oil exports. Rosneft’s investment return will come from proceeds of a fixed tariff fee and profit margin rate. Still, this might put Rosneft on some sort of collision course with Gazprom, which is advancing steadily with the construction of the TurkStream pipeline (the construction of the first 15.75 BCm/year string is already underway; the second awaits government approval).

If the Kurdish gas pipeline does indeed connect to TANAP, than Gazprom is definitely fully focusing on TurkStream and speeding up its construction (it stalled because Gazprom was unwilling to provide a 10.25 percent base discount absent any inter-governmental agreement). There have been rumors that Gazprom might fill the yawning gap in TAP’s capacities, now they’ll most certainly subside.

Turkey was exploring the possibilities of bringing in Kurdish gas for some time before signing a milestone agreement in November 2013, which stipulated that the first supplies were bound to begin in 2017 (from a relative low level of 4 BCm/year) and increase steadily until the total volume reaches 20 BCm/year. Turkey’s rapidly growing gas demand is met from Russia, Iran, Azerbaijan and various LNG imports, however, now with Kurdish gas entering the mix, Ankara can shake off ties to suppliers whose gas is too pricey, e.g.: Iran.

The Kurdish pipeline would also help Turkey avoid dependence on Russian gas, supplied via BlueStream to the central part of the country and via TurkStream to the West. The gas link would also contribute to Turkey’s foreign policy by putting PKK, the political standard-bearer of Turkish Kurds, into a difficult position—sabotage attacks on the pipeline would smack of intra-Kurdish struggle.

The Kurdistan region of Iraq is estimated to have 3.6 TCm of gas reserves, the overwhelming majority of which is non-associated. This number, however, might increase in the future in case oil and gas companies direct their attention to Kurdistan’s Permo-Triassic carbonates that show many similarities to Iran’s Fars fields.

Up to now, Iraqi Kurdistan has had no experience with gas exports; its gas production of 3.5-4 BCm was barely sufficient to cover for domestic needs. The only major producing gas field was Khor Mor, which reached its 3.5 BCm/year production peak in 2014 and has fallen ever since.

Although many new projects have popped up on the horizon recently, not all of them will be bound for export, as the Kurdish Regional Government is trying to use the nascent gas boom to its advantage, promoting the usage of natural gas in domestic power generation.

Specific sources for the Kurdistan-Turkey gas pipeline have not been stated, however, one can earmark the gas fields that will play a role in Iraqi Kurdistan’s gas production hike.

The most ambitious projects take place under the aegis of the Anglo-Turkish Genel Energy, its Miran and Bina Bawi gas fields (total recoverable reserves of cca 350 BCm) will add 11-12 BCm/year of gas production by the end of the decade. The government has fixed a $42.5/MCm tariff for the raw gas produced by Genel under the 2015 take-or-pay agreement. Repsol’s Kurdamir (estimated recoverable reserves of 27 BCm) and Topkhana (33 BCm) are also being appraised and should be commissioned in the next few years. Yet currently producing fields will experience a renaissance, too, after the KRG settled a long-standing pricing dispute with the Pearl Consortium. As part of the settlement, gas output on the Pearl Consortium-controlled Khor Mor and Chemchemal fields (total reserves of 480 BCm) will be increased to an aggregate 8 BCm/year. If the Kirkuk area remains in Kurdish hands, KRG’s gas export prospects will become even more fortunate.

Despite favorable economics and plentiful resources, the Kurdistan-Turkey gas pipeline deal is laden with geopolitical consequences.

First, the announcement came about just a week from the Kurdish independence referendum on September 25, which, albeit non-binding, is an aggravating factor in Kurdish-Iraqi relations.

Second, Turkey’s leadership is strongly susceptible to make a sudden volte-face in its pursuit of foreign policy objectives; should a need arise to mend strained ties to Baghdad, Erbil might find itself under a cloud. From Rosneft’s point of view, the gas pipeline deal’s shortcomings are strictly finance-related. There are no significant political risks on the table, as the company isn’t active on the Iraqi oil market.

It’s highly questionable that Baghdad take out its ire on other Russian companies operating in Iraq, namely, LUKOIL and Gazprom Neft. Not all possible consequences are negative, though, because if you omit Azerbaijan, Kurdish gas is the closest the European Union can get to diversify its gas sources away from Russia.

The bitter irony is that Kurdish gas is to be sent to Europe by Russia’s leading oil and gas company.

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